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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: SHRI PRADIP KUMAR KEDIA & SHRI MAHAVIR PRASAD
PER MAHAVIR PRASAD, JUDICIAL MEMBER 1. ITA No. 41/Ahd/2017 & C.O. No. 29/Ahd/2017 are appeal by the Revenue and cross objection of the Assessee preferred against the order of the Ld. CIT(A)-2, Vadodara dated 10.10.2016 pertaining to A.Y. 2012-13. The Revenue has taken following grounds of appeal: 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) has erred in law and on facts in deleting the disallowance of Rs. 1,74,41,824/- made by the AO by invoking provisions of section 40(a)(ia) of the Act, without appreciating the fact that the assessee was paying brokerage payment to sub-brokers within the meaning of section 194H, thereby attracting the mandatory provisions of section 40(a)(ia) of the Act". 2. 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) has erred in law and on facts by partly allowing the appeal of the assessee on the issue of disallowance of Rs.21,53,344/- u/s 14A of the Act without appreciating the fact that the intention of Legislature is to disallow all expenses incurred to earn exempt income and for this purpose a scientific rule in the form of Rule 8D has been incorporated in IT Rules, 1962"
Brief facts of the case are that the assessee is engaged in company is broking business in capital market and future and option market. The company is a member of National Stock Exchange of India Ltd (NSE) in a Capital market
ITA Nos. 41/Ahd/17 & 3 C.O. 29/Ahd/17& Others . A.Y. 2012-13 Segment, Bombay Stock Exchange Ltd (BSE) and NSE F&O Segment. It is also Depository with Central Depository Services (India) Limited.
The company is a Broker dealing in transactions (Buy or Sell) of securities on behalf of clients of the Company and /or Sub Broker of the Company.
So far ground relating to deleting disallowance of Rs. 1,74,41,824/- made by invoking section 40(a)(ia) of the Act on brokerage payment to sub-brokers
Ld. A.O. has discussed the issue at page no. 2 to 6 in para no. 4 and ld. CIT(A) has discussed the issue at page no. 2 to 27 in para 2 to 4. The assessee company is engaged in the broking business in capital market and future and option market also. It is a member of NSE and BSE. The assessee company has paid commission to sub-brokers amounting to Rs. 1,74,41,824/-. A survey action for TDS verification was carried out in the case of assessee company on 13.01.2015 and accordingly, an order u/s. 201(1)/201(1A) passed on 09.03.2015 by the ITO(TDS)-2, Vadodara. It contended that in the case of case of ITO vs Mittal Investment & Co. [2013] 33 taxmann.com 52 (Delhi - Trib.), held that sub-brokerage paid by an agent to sub-agents for services rendered in connection with securities/mutual funds, is outside purview of section 194H. Hon'ble ITAT has held as under : "15. A bare perusal of the shove Explanation clearly shows that if the commission or brokerage has been paid by a person acting on behalf of another person for services rendered in connection with securities then the said commission or brokerage is outside the purview of section 194/7. Clause (h) of sub-section (2) of the Securities Contract Act reads as under: - "Clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) defines securities as under: (h) "securities" include -
ITA Nos. 41/Ahd/17 & 4 C.O. 29/Ahd/17& Others . A.Y. 2012-13 (i) shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ie) any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iia) rights or interest in securities;" 16. Thus, it is evident that mutual funds are outside the ambit of the term 'securities'. In the present case, admittedly the assesses was agent of post office schemes, PPF, RBI Bonds, LIC, Mutual Funds etc. and, therefore, the commission paid by it to other persons whose services were taken for earning commission was also outside the purview of provisions of section 194H. The definition uses the term "in relation to" which clearly implies that whenever any commission or brokerage is paid in relation to securities then it would be outside the ambit of section 194H. Admittedly, the assessee had paid sub-brokerage in relation to securities (mutual fund) and, therefore, it was outside the ambit of section 194H...".
In view of the above discussion and specifically in view of Explanation to section 194H, any payment in relation to transaction relating to securities did not attract the provisions of section 194H of the Act. In view of the decision of Hon'ble Mumbai ITAT in SCHIL Services Ltd. (supra), the provisions of sect/on 194H are not applicable to the transactions relating to payment of sub
ITA Nos. 41/Ahd/17 & 5 C.O. 29/Ahd/17& Others . A.Y. 2012-13 brokerage in relation to sale and purchase of shares and securities. The A.O. has failed to explain as to how the said transactions fall within the purview of TDS provisions.
In parity with view taken in Co-ordinate Bench, we hold that assessee company was not liable for deduction of tax u/s. 194H or 194J on payment of brokerage to the sub-brokers and accordingly we hold that no disallowance u/s. 40(a)(ia) was called for. Thus, this ground of Revenue is dismissed.
Now we come to next ground relating to part relief for addition made u/s. 14A of the Act.
Ld. A.O. has discussed the issue at page no. 11 to 14 in para no. 9 and ld. CIT(A) has discussed the issue at page no. 29 to 30 in para 4.4. The assessee company has utilized borrowed funds for purchase of shares and securities and paid interest of Rs.70,95,271/-. Accordingly, the AO invoked provisions of section 14A r.w.Rule 8D and disallowed a sum of Rs.19,38,286/- out of interest and Rs. 2,15,058/- on account of administrative expenses being 0,5% of the average value of investment. The average value of investment in the shares and securities was considered by the AO at Rs.4,30,11,561/-.
In appeal, ld. CIT(A) partly allowed the appeal of the assessee.
Ld. A.R. contention is that there is no exempt income. However, the alternative argument of the assessee that the disallowance u/s. 14A cannot exceed the exempt income, appears to be acceptable. In this regard, beside his submission, ld. A.R. also cited an order of Jivraj Tea Ltd. vs. DCIT in ITA No. 866/Ahd/2012 wherein it is held that disallowance u/s. 14A cannot be more
ITA Nos. 41/Ahd/17 & 6 C.O. 29/Ahd/17& Others . A.Y. 2012-13 than the amount exempted income. Since the exempted income was Rs. 6,20,115/- only, the assessing office was directed to restrict the disallowance to that extent only.
In the case, disallowance of Rs. 37,31,391/- u/s. 14A which included disallowance out of interest at Rs. 35,20,675/- and disallowance on account of administrative expenses being 0.5% of the average value of investment resulting into disallowance of Rs. 2,10,716/- . So in our considered opinion, ld. CIT(A) was justified by directing the A.O. to restrict disallowance not more than exempted income. Therefore, in our considered opinion, ld. CIT(A) has passed reasoned and detailed order and same does not require any kind of interference at our end.
In the result, this ground of appeal is dismissed.
C.O. No. 29/Ahd/2017 for A.Y. 2012-13. The assessee has taken ground that ld. CIT(A) has erred in confirming disallowance of financial charges paid of Rs. 3,15,000/- invoking section 40A(2)(b) of the Act.
Ld. A.O. has discussed the issue at page no. 7 to 10 in para no. 7 and ld. CIT(A) has discussed the issue at page no. 27 to 29 in para 4.2. This ground pertains to disallowance of Rs.3,15,000/- being the financial charges paid to the related party u/s 40A(2)(b). It has been claimed that the appellant company has borrowed funds against the securities provided by the various related persons and accordingly, financial charges of Rs. 13,65,000 were paid. A sum of Rs. 6,30,000/- was paid to Shri H.D.Shah (HUF), in which Director of appellant company had interests. To this party, financial charges have been paid at fixed
ITA Nos. 41/Ahd/17 & 7 C.O. 29/Ahd/17& Others . A.Y. 2012-13 rate of Rs.52,500/-per month. Since there was no justification for payment of fixed financial charges to Shri H.D. Shah (HUF), the A.O. disallowed 50% thereof resulting into a disallowance of Rs. 3,15,000/-.
Similar disallowance was also made for assessment year 2008-09 and the then ld. CIT(A) confirmed the addition on this count. Therefore, in parity with the said order, ld. CIT(A) also confirmed the action of A.O. and confirmed addition of Rs. 3,15,000/-. On the other hand, ld. A.R. Cited an order of ITAT Ahmedabad in assessee’s own case for assessment year 2008-09 wherein relief was granted by the ITAT in ITA No. 1023/Ahd/2016 with following observation:
When this appeal was taken up for hearing, it was noticed that the Assessing Officer had disallowed 50% of financial charges paid to the specified persons, but there was no categorical finding as to what is the fair market value of the services provided by these specified persons. Such an adhoc disallowance under section 40A(2)(b), in our considered view, is not permissible under the scheme of the Act. We, therefore, asked the parties to address us on this fundamental and broad legal proposition.
We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
We find that a co-ordinate bench of this Tribunal and speaking through one of us (i.e. the Accountant Member), in the case of ACIT vs. Ashok J. [Patel [(2013) 59 SOT 53 (Ahd)] had observed as follows :- "7. It is plain on principle that, so far as disallowance under Section 40A(2) for payment being excessive or unreasonable can only be made when the payment is made to the "specified persons" under clause 40A(2)(b) and "the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market price of the goods, services or facilities for which the payment is made". The opinion of the Assessing Officer for the expenditure being excessive or unreasonable is
ITA Nos. 41/Ahd/17 & 8 C.O. 29/Ahd/17& Others . A.Y. 2012-13 to be formed vis-a-vis fair market price of such goods services or facilities. It is thus sine qua non for making a disallowance under section 40(A)(2) that the Assessing Officer has to ascertain the fair market price of such goods, services or facilities, and then make a 'disallowance for the amount which is in excess of fair market value of such goods, services or facilities. Unless there is a categorical finding about the 'fair market value' and the assessee has an opportunity to be heard on Assessing Officer's findings about such 'fair market value', there cannot be an occasion to make a disallowance under section 40A(2). The very scheme of Section 40A(2) does not envisage an adhoc disallowance as has been made in the present case. For this short reason alone, the impugned deletion of disallowance must stand confirmed. There is, however, one more reason for doing so. As evident from a plain reading of the assessment order, the Assessing Officer had called upon the assessee to demonstrate that the payment made by the assessee to the specified persons is not unreasonable or excessive, and it is thus failure of the assessee which has resulted in disallowance under section 40A(2). However, proving a negative, as the assessee has been called upon to do in this case, is an impossible onus to perform. In any event, this onus is on the Assessing Officer and the AO has failed to discharge the said onus. For this reason also, the disallowance is unsustainable in law. As regards the discrepancy in the figures of the tax audit report and the assessee, neither such a situation can be a reason enough to make a disallowance under section 40A(2) nor the onus of explaining such a variation is on the assessee. A tax auditor is an independent professional and any errors in his report cannot be put to assessee's disadvantage. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter."
The views so expressed by the co-ordinate bench were duly approved by Hon'ble jurisdictional High Court, in the judgement reported as CIT vs. Ashok J Patel [(2014) 43 taxmann.com 227 (Guj.)]. While so approving the views of the co-ordinate bench, Their Lordships have inter alia observed as follows : "8. That the assessee who is in the business of transportation claimed disallowance with respect to motor bus rent paid to various persons for transportation contracts. The AO was of the view that the assessee has failed to produce any comparative market price and that the nature of work carried out by the aforesaid persons is general in nature. The AO
ITA Nos. 41/Ahd/17 & 9 C.O. 29/Ahd/17& Others . A.Y. 2012-13 disallowed Rs.15,49,163/- for AY 2005-06 and Rs.14,97,668/- for AY 2006- 07 out of the total payment of bus rent under section 40A(2)(b). With respect to AY 2006-07 AO also made disallowance of Rs.93,25,426 made under section 40(a)(ia) of the Act by holding that the amendment carried out by Finance Act, 2010 can be held to be retrospective from AY 2005-06. Now, so far as the disallowance made under section 40A(2)(b) of the Act on the ground of motor bus rent is concerned, it appears that the AO disallowed 5% of the total payments towards motor bus rent by observing that the assessee has failed to reconcile the difference in payments as per tax audit report and as submitted during the assessment proceedings and had also not produced any comparative prices. The learned CIT(A) deleted the said disallowances by observing that the AO has not made out any case for excessive or unreasonable payments to the related purpose towards the motor bus rent. The learned CIT(A) also observed that no comparative prices for similar transport services was cited by the AO and therefore, was not justified in making ad-hoc disallowance of 5% under section 40A(2)(b) of the Act and therefore, the CIT(A) as such rightly deleted the disallowances made under section 40A(2)(b) of the Act. Considering the provisions of Section 40A(2)(b) of the Act and the Evidence Act, if the AO was of the opinion that the payment for which disallowance is claimed, is excessive or unreasonable. In that case, it was for the AO to assess fair market price and give comparative instances for payment for similar transport service. In absence of such comparative cases brought on record, as rightly observed by the ITAT it was not open for the AO to make disallowance under section 40A(2)(b) of the Act. While deleting disallowance made by the AO under section 40A(2)(b) of the Act, the learned ITAT has observed and held in para 7 as under :-- "7. It is plain on principle that, so far as disallowance under Section 40A(2) for payment being excessive or unreasonable can only be made when the payment is made to the "specified persons" under clause 40A(2)(b) and "the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market price of the goods, services or facilities for which the payment is made". The opinion of the Assessing Officer for the expenditure being excessive or unreasonable is to be formed vis-a-vis fair market price of such goods services or facilities. It is thus sine qua non for making a disallowance under section 40(A)(2) that the Assessing Officer has to ascertain the fair market price of such goods, services or facilities, and then make a 'disallowance for the
ITA Nos. 41/Ahd/17 & 10 C.O. 29/Ahd/17& Others . A.Y. 2012-13 amount which is in excess of fair market value of such goods, services or facilities. Unless there is a categorical finding about the 'fair market value' and the assessee has an opportunity to be heard on Assessing Officer's finding about such 'fair market value', there cannot be an occasion to make a disallowance under section 40A(2). The very scheme of Section 40A(2) does not envisage an adhoc disallowance as has been made in the present case. For this short reason alone, the impugned deletion of disallowance must stand confirmed. There is, however, one more reason for doing so. As evident from a plain reading of the assessment order, the Assessing Officer, had called upon the assessee to demonstrate that the payment made by the assessee to the specified persons is not unreasonable or excessive, and it is thus failure of the assessee which has resulted in disallowance under section 40A(2). However, proving a negative, as the assessee has been called upon to do in this case, is an impossible onus to perform. In any event, this onus is on the Assessing Officer and the AO has failed to discharge the said onus. For this reason also, the disallowance is unsustainable in law. As regards the discrepancy in the figures of the tax audit report and the assessee, neither such a situation can be a reason enough to make a disallowance under section 40A(2) nor the onus of explaining such a variation is on the assessee. A tax auditor is an independent professional and any errors in his report cannot be put to assessee's disadvantage. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter." We are in complete agreement with the view taken by the ITAT and the observations made by the learned ITAT while deleting disallowances made by the AO under section 40A(2)(b) of the Act on motor bus rent. No error has been committed by the learned ITAT which calls for interference of this Court. No question of law much less any substantial question of law arises."
Quite clearly, therefore, the present legal position is that an adhoc disallowance under section 40A(2)(b) is inherently unsustainable in law. For this short reason alone, we delete the impugned disallowance of Rs.10,35,000/- under section 40A(2)(b). The assessee gets the relief accordingly.
We may also add that even though it is second round of proceeding before the Tribunal, and this aspect of the matter was not examined in the first round of
ITA Nos. 41/Ahd/17 & 11 C.O. 29/Ahd/17& Others . A.Y. 2012-13 proceeding, in our considered view, this aspect can be taken up for consideration even at this stage. Whether an adhoc disallowance under section 40A(2)(b) can be made at all or not is something which goes to the root of the matter, and in the light of law laid down by Hon'ble Bombay High Court in the case of Inventors Industrial Corporation Limited vs. CIT [(1992) 194 ITR 548 (Bom)] such issues can be raised at any point of time.
As the grievance of the assessee is upheld for the above short reason, we see no need to address ourselves to other aspects of the matter.
In parity with the view taken in above said ITAT order, we allow ground of the assessee.
In the result, we direct the A.O. to delete the addition of Rs. 3,15,000/-.
Now we come to next ground pertaining to confirming of disallowance of Rs. 83,492/- being depreciation claimed @ 15% on electrical fitting being part of P&M.
At the outset, ld. A.R. is fair to concede that this ground is against the assessee in view of the order passed in the case of assessee for assessment year 2009-10 in ITA No. 1747/Ahd/2013 page no. 10 to 11 in Para 9. After considering the fair submission made by the ld. A.R., we dismiss this ground of appeal.
ITA No. 3545/Ahd/2016 for A.Y. 2012-13 Assessee’s appeal.
First ground is relating to confirming adhoc disallowance @ 50% of financial charges paid invoking section 40A(2)(b) of the Act.
ITA Nos. 41/Ahd/17 & 12 C.O. 29/Ahd/17& Others . A.Y. 2012-13 22. Ld. A.O. has discussed the issue at page no. 7 to 10 in para no. 7 and ld. CIT(A) has discussed the issue at page no. 27 to 29 in para 4.2. Since already we have allowed the claim of the assessee in C.O. No. 29/Ahd/2017, therefore, having parity with the said order, we allow this ground of appeal of the assessee.
Now we come to ground relating to confirming disallowance of Rs. 83,492/- depreciation claimed @ 15% on electrical fitting being part of P&M.
We have decided this issue against the assessee in view of the fair admission by the ld. A.R. and similar ground we have decided against the assessee in connected C.O. No. 29/Ahd/2017. Therefore, this ground of appeal is dismissed.
Now we come to ground no. 3 & 4 relating to restricting the disallowance made u/s. 14A to the extent of exempt income instead to no disallowance been called for in absence of exempt income.
Ld. A.O. has discussed the issue at page no.11 to 14 in para no. 9 and ld. CIT(A) has discussed the issue at page no. 29 to 30 in para 4.4. In this case, a disallowance of Rs.21,53,344/-made u/s 14A r.w. Rule 8D. Undisputedly, the appellant company has utilized borrowed funds for purchase of shares and securities and paid interest of Rs.70,95,271/-. Accordingly, the AO invoked provisions of section 14A r.w.Rule 8D and disallowed a sum of Rs.19,38,286/- out of interest and Rs. 2,15,058/- on account of administrative expenses being 0.5% of the average value of investment. The average value of investment in the shares and securities was considered by the AO at Rs.4,30,11,561/-.
ITA Nos. 41/Ahd/17 & 13 C.O. 29/Ahd/17& Others . A.Y. 2012-13
On the other hand, ld. A.R. contention is that there is no exempt income and in view of Corrtech Energy Pvt. Ltd. case, plea of the assessee should be accepted but we would like to accept alternative plea of the ld. A.R. and this issue is set aside to the file of the Assessing officer to see the quantum of exempt income and thereafter decided the issue of disallowance but in any case disallowance not to be made more than the exempted income. Therefore, we set aside this issue to the file of A.O. to see whether any exempt income is there or not, thereafter will decide issue as per provision of law.
In the result, this appeal is partly allowed.
Order pronounced in Open Court on 08- 04- 2019
Sd/- Sd/- (PRADIP KUMAR KEDIA) (MAHAVIR PRASAD) ACCOUNTANT MEMBER True Copy JUDICIAL MEMBER Ahmedabad: Dated 08/04/2019 Rajesh Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) – 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER
Deputy/Asstt.Registrar ITAT,Ahmedabad